Still badly bruised by a fiasco in subprime lending, Wall Street has found a new outlet for providing loans to shaky borrowers: so-called asset-based lending.

Asset-based loans tend to be tied to a company’s receivables – such as their inventory, machinery and equipment, or other forms of collateral – that a bank or financial institution could tap into if a loan goes bad.

Unlike the subprime loans sold to mom-and-pop investors, asset-based debt offers some of the most onerous terms on Wall Street for borrowers.

Asset-based lenders can take possession of the receivables in the event of default and only lend against a portion of what the assets are worth.

Many large financial firms such as CIT Group have found themselves on the sidelines due to bad bets in subprime mortgages, which is expected to pave the way for many more players to enter the asset-based lending space.

Citigroup is proof of that. Sources said the struggling banking giant is arranging an asset-based loan of about $1 billion for an unidentified retailing outfit. Details of the deal could not be determined at presstime, and a Citi spokeswoman declined to comment.

“From the lender perspective, they can get comfortable with the fact that they can get their money back,” said Michael Gray, partner at Neal, Gerber & Eisenberg LLP, which advises companies on forming funds.

Cash-strapped borrowers are finding they have little recourse given that most banks are still licking their wounds from the loose lending terms of the past two years.

What’s more, few borrowing alternatives exist for troubled manufacturers and retailers, which find themselves in need of cash to run their businesses.

“From the company’s perspective, these are attractive [loans] because maybe they are in distress and they can’t meet stricter financial convenants,” Gray added.

Despite the strict terms, asset-based loans are being offered at interest rates in the low- to mid-teens range, noted Gray.

Big banks including JPMorgan Chase, Wachovia Securities, and Bank of America have originated $16.5 billion in asset-based loans this year, compared with $13 billion a year ago, according to Reuters Loan Pricing Corp.

Hedge funds and private-equity shops, including Cerberus, D.E. Shaw and other start-up lending platforms are piling into the asset-based lending arena as well, offering loans with eye-popping interest rates to troubled companies of all stripes.

“These funds are thinking, ‘Why should I invest in equity when I can get debt-type returns,'” said one industry participant.